Is high taxation sustainable for an economy like Pakistan’s?

By Matthias Samuel

Taxes are imposed by the government to raise required revenues to meet expenditures. The imposition of taxes not just increases revenue but also helps to control and regulate the patterns of consumption, production and distribution. Taxes thus affect an economy in various ways. The effects of taxes may not necessarily be good, there are some bad effects of taxes too. If the resources collected through taxes are utilized for development projects, it will increase employment in the economy. If taxes affect the volume of savings and investment badly then downturn and unemployment problem will arise. Problems can also be caused because of   progressive taxation. High marginal tax rates can discourage work, saving, investment, and innovation, for example, Honda Atlas Cars Pakistan (HACP) shut down its plant for 10 days due to imposition of new, higher taxes in the budget and steep currency devaluation. The business sector is badly affected because of the high taxes. This also became the cause of a lot of strikes by the trader community.

Since, Pakistan has entered a loan program with the International Monetary Fund (IMF), which requires the government to fix the economy, Hammad Azhar, the Minister of State for Revenue, proposed several new taxes and policy measures that will not only create inflationary pressures but also slow down economic growth and keep the job market under pressure. The PTI government, from day one has been facing the formidable task of a twin deficit. On the local front, its expenses are far greater than its income, causing a deficit of more than Rs 2,000 billion. On the international front, our exports have not increased while imports keep rising and even in this situation the government is not lowering the taxes. This trade imbalance just because of the imposition of taxes ate up our dollar reserves, leaving us with little to no dollars to continue our imports and repay our foreign loans. Exports, trade, sell and purchase have been affected a lot, people do not buy goods because the taxes are too high, from a common man to a reputed business-oriented person everyone has stopped the business. The idea of government was to tax the rich, but they forgot that there is also a poor and middle class and imposed taxes on them too. Maybe they thought that they can be the modern-day Robin hood of Pakistan but without understanding that he only took from the rich. However, tax imposition is not all bad there are some bright sides of it to.

The government wants to try every possible trick in its book to raise more revenue which is understandable. High taxes can be good if the government spends it wisely. People will be okay with high taxes if they can see it in action, such as quality schools, hospitals services, improvement in infrastructure and a strong social safety net. Higher taxes coupled with a balanced budget usually means less debt because the government doesn’t have to borrow money to finance basic government services. It also means that the government is more likely to have a surplus which can either be reinvested in the economy through tax returns or funds programs that may have been considered a want instead of a need. The loans borrowed from IMF are to be paid back, for which that the government has imposed high taxes the goal is to make the economy of Pakistan better than it ever was within two years. There is this simple thing that everyone likes the fire, the police, the military department protecting one from others. Everyone likes streets repaired and water delivered, and garbage picked up all these things only happen if taxes are payed. The current government is under a lot of pressure, it has to pay back the loan borrowed from the IMF as well as other unpaid loans, it has to work for the welfare of the public, it has to run the system smoothly. These things require a lot of revenue which can only be generated through taxes. Taxes basically pay the bills of the country.

It may take two years before economic growth can bounce back and the government is able to fix the larger economic problems. If not, then Pakistan could be looking at another bailout which means the government failed to do the work properly. Paying taxes even though sounds difficult but at the end of the day, taxes run the country. Progressive taxation always ends up in a bad way. The government should only work for the welfare of the public. Taking from the rich is good strategy but this is not a fantasy film, tax is imposed on everyone. The imposition of taxes should be balanced, neither should it be a burden on the people, nor be too low that the government runs on deficit.